Irish bonds rally on expectation of bailout

MARKETS:THE VALUE of Irish bonds rose yesterday despite an announcement early in the day that London clearing house LCH Clearnet was increasing the margin it charges on Irish sovereign debt for the second time in less than a week.

The yield, or interest rate on Irish bonds – which has an inverse relation to bond prices – fell to just over 8.1 per cent as markets closed yesterday. The yield had hit highs of more than 9 per cent late last week.

Similarly, the spread between Irish and German bonds – the benchmark used for European governments’ debt – narrowed to 552 basis points yesterday evening, down significantly from the peak of 700 basis points reached last week.

Nonetheless, international market commentators emphasised that the strengthening in the value of Irish benchmark bonds reflected a growing conviction that some form of financial bailout for Ireland was imminent.

The value of 10-year bonds did take a hit early on in the day on the back of the news that LCH Clearnet was increasing the margin it charges on trades of Irish debt, before rallying later in the day as expectation of a bailout mounted.

The London-based clearing house announced yesterday its intention to increase the deposit its clients have to pay on Irish bond trades to 30 per cent. This follows its decision to increase its margin requirements for Irish Government debt last week to 15 per cent. Margins on most debt are typically 3-5 per cent.

LCH Clearnet is one of Europe’s largest clearing houses, and its decision to increase rates will put pressure on clients to provide extra cash in order to trade in Irish bonds. Approximately €95 billion of Irish Government debt is in issuance, 85 per cent of which is held by foreign investors.

Allied Irish Banks holds approximately €4 billion in Irish Government debt, while Bank of Ireland’s holding is closer to €1 billion.

While two Irish banks, Bank of Ireland and Anglo Irish Bank, are clients or “clearing partners” of LCH Clearnet, it is believed AIB also uses the services of the company through a third party.

Bloxham’s Tom Reilly said it was likely that shorter-term Irish debt would be more affected by the Clearnet decision.

The shorter end of the Irish debt market remained under pressure yesterday, with two and three-year Irish Government debt failing to see the gains enjoyed by the longer-term issuance.

Meanwhile, the value of the Irish banks’ own debt was also under pressure as international investor focus turned to the precarious position of Irish banks.

AIB’s Lower Tier 2 12.5 per cent subordinated debt due in 2019 fell to 51 cent yesterday. Although slightly better than the low of 47.7 cent reached last Thursday, it compares with a trading level of just over 90 cent to the euro a month ago.

Similarly, Bank of Ireland’s 10 per cent debt due in 2020 was trading at 70 cent in the euro yesterday, compared to a bid price of 114 cent in April.

Meanwhile, Portugal was forced to pay more to borrow money yesterday when it auctioned €750 million of 12-month debts at a scheduled auction. The securities were issued at an average yield of 4.813 per cent, compared to a yield of 3.26 per cent at a similar auction on November 3rd. Demand was also lower. The auction attracted bids for 1.8 times the amount offered, compared with a bid-to-cover ratio of 2.2 on November 3rd.

The euro also rose yesterday on the back of the strengthening Irish bond yields, climbing 0.3 per cent to $1.3526.

Market commentary yesterday was characterised by a mounting conviction that some form of rescue plan will be agreed between the Government and EU and IMF officials.

Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank in London, said there was a belief that a deal was imminent. “It seems pretty inevitable that some kind of deal will be done.”